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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Sky Company reports a pretax operating loss of $50,000 in Year 3 for both financial reporting and income tax purposes. Its reported pretax financial income and taxable income for the previous 2 years had been: Year 1: $20,000 and Year 2: $30,000. Calculate Sky’s income tax benefit from operating loss carryforward for Year 3. The tax rate for all years is 21%.

To determine

Determine the income tax benefit from operating loss carry forward for Year 3.

Explanation

Net Operating Loss Carry forward:  The net operating loss is considered as negative taxable income. When the tax-deductible expenses exceed the taxable revenues, the net operating loss is carry forwarded as it helps in getting deductions in future taxable amount.

Determine the income tax benefit from operating loss carry forward for Year 3:

In this case, Company S reports a pre-tax loss of $50,000 in Year 3 for both financial reporting as well as for tax reporting purpose. Now, Company S has 2 previous year’s taxable income. Year 1 having $20,000 taxable income with tax rate of 21% and Year 2 is having taxable income of $30,000 with 21% tax rate.

Therefore, the income tax refund for Year 3 would be the sum total of income tax payable for Year 1 and Year 2, which is calculated as below:

Income Tax Refund (Year 3

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